Foxconn deal seen as hope for BlackBerry’s turnaround

After reporting a US$4.4 billion lost, BlackBerry Ltd. today announced that it has signed a five year deal with Taiwanese electronic contract manufacturer Foxconn Technology Group to manufacture the Canadian company’s devices for it.

BlackBerry hopes to offload much of the cost of its unprofitable hardware manufacturing operations to Foxconn so that it can focus more on the software and services side of its business.

The financial report released by BlackBerry (TSE: BB) today showed that its latest line of BlackBerry 10 smart phones which were publicized as the products that would help the company regain much needed market share were hardly selling.

In an uncharacteristically candid call with analysts today, the company’s new CEO, John Chen admitted that the strategy of relying on the BB10 lineup ended up in “results that were less than desirable.”

He asked analysts not to “poke my eye” right away and said bringing BlackBerry to a revenue-neutral status will likely take two to three quarters.

BlackBerry stock prices rose 17 per cent, or $1.09, to $7.34 in New York, shortly after 11 a.m. Friday, after Chen presented his plans to turnaround the battered company.

The company’s financial report showed that older BlackBerry 7 models made up more than 74 per cent of the 4.3 million BlackBerry devices sold during for the period ending November 30. Poor sales of the BlackBerry Z10, Z30, Q10 and Q5 devices helped pull down revenue to $1.19 billion, down 56 per cent from last year. The figure was about $400 million than the $1.59 billion that most analysts estimated.

“We admit the fact that in the past maybe we haven’t really lined ourselves up as we probably should have done,” said Chen. “That has affected our results and the market has spoken. We listened and we’re going to listen eve more going forward.”

Chen said that Foxconn (TPE: 2354) and Blackberry will initially work together on the development of a handset that will be built in the Taiwanese company’s factory in Indonesia.

“The first product will be out most likely in March or April…It’s codenamed Jakarta,” Chen said and much later added: “I actually have one in my hand right now it’s running on BB10.

He did not provide more details.

James Yersh, BlackBerry CFO, said Foxconn will later on make more products for BlackBerry in its factories in Indonesia and Mexico.

BlackBerry will own all of its intellectual property and handle quality assurance through Foxconn. BlackBerry will developed the software while Foxconn will manufacture the handset, handle logistics and inventory.

Blackberry will pay Foxconn for making the handset and BlackBerry will make money by selling the phones to customers at a margin.

The strategy is “risky” but it is the most “cost effective solution” for BlackBerry at the moment, according to Ontario-based independent technology analyst Carmi Levy.

“The BlackBerry 10 platform clearly failed to capture the public’s attention and it is the root of where BlackBerry is right now,” he said. “By offloading the costs and risks associated with hardware inventory, Chen and his new management team can concentrate on their new focus which is software and enterprise services.”

Foxconn factories in Chna are under scrutiny by authorities in connection with labour practices and working conditions in the facilities, Levy said.

He said this signals that BlackBerry is going back to its enterprise-centric roots.

On the hand, Levy said, outsourcing BlackBerry handset manufacturing to Foxconn can dilute BlackBerry’s image of exclusivity and security. Foxconn also manufactures a wide range of products for other companies including the iPad,iPhone and iPod for Apple Inc. ((NASDAQ: AAPL) as well as other devices like the Kindle tablet, PlayStation 3, Playstation 4, and the Wii.

Chen said he foresee a lot of opportunity for QNX to make a huge impact in the lucrative machine-to-machine (M2M) space.

He also suggested that the growing interest of iOS and Android device users on BBM could be a potential consumer base. BlackBerry recently offered BBM as a free download for iOS and Android devices. As many as 40 million iOS and Android device users are believed to have downloaded BBM.

“Sixty per cent of iOS and Android users are using BBM daily and the average length of use is 90 minutes a day,” said Chen.

The operational changes will turn BlackBerry’s old strategy on its head, according to Ronald Gruia, principal telecom analyst with business consulting firm Frost & Sullivan.

He said BlackBerry cannot completely abandon its hardware business but it will increasingly become a smaller part of the business.

“Right now about 40 per cent of BlackBerry revenues are coming from hardware, 53 per cent from services and 7 per cent from software,” he said. “Gradually you will see this shifting more towards services and software.”

Gruia said rehabilitating BlackBerry will take some time.

“It’s unfortunate that Chan does not have the luxury of time,” he said. “Investor gave Nortel several years, but with today’s shortened development cycles and the nature of the mobile industry, he only has about two to three quarters to start showing results.”

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